The Obama Administration threatens to attack Iran a lot, but there is increasing concern among Israeli analysts that his heart just isn’t in it, and that the threats are empty. Joint Chiefs of Staff Chairman Gen. Martin Dempsey will visit Israel next month in an attempt to calm those concerns.

The visit, scheduled for mid-January, will center around meetings with his Israeli counterpart Lt. Gen. Benny Gantz and top Israeli officials to discuss the possible US and/or Israeli attack on the nation.

Dempsey had previously expressed concern that Israel might decide to attack Iran on their own without telling the US until after the fact, but in recent days his public comments have centered around the US ability to attack Iran whenever it wants to.

The announcement of Dempsey’s visit comes as the US and Israel are said to be in talks about the potential excuse to be used in the event they actually attack Iran, with Israelis said to be furious at Defense Secretary Leon Panetta for comments that seemed to oppose the idea of war.

The announcement of Dempsey’s visit comes as the US and Israel are said to be in talks about the potential excuse to be used in the event they actually attack Iran, with Israelis said to be furious at Defense Secretary Leon Panetta for comments that seemed to oppose the idea of war.

China’s factory activity shrank again in December as demand at home and abroad slackened, a purchasing managers' survey showed on Friday. This will be seen to reinforce the case for pro-growth policies to underpin the world's second-largest economy.

The People's Bank of China (PBOC) is widely expected to lower its requirement for the amount of cash banks must hold as reserves to let lenders inject more credit into the economy to combat Europe's debt crisis and sluggish US demand.

The HSBC Purchasing Managers' Index (PMI), designed to preview the state of Chinese industry before official output data is published, inched up to 48.7 in December from a 32-month low of 47.7 in November, but fell short of the flash reading of 49. HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13% in industrial output.

The HSBC PMI has been mostly under 50, which demarcates expansion from falling growth, since July.

"While the pace of slowdown is stabilising somewhat, weakening external demand is starting to bite," said Qu Hongbin, China economist at HSBC.

He said China would avoid a hard economic landing so long as policy easing measures filtered through in coming months. China's once turbo-charged economy is on track to slow for a fourth successive quarter, easing further from the first quarter's 9.7% annual growth rate with economists expecting the final three months of the year to have slipped below 9.5%.

The official PMI, due to be published on Sunday, is expected to paint a similar picture, suggesting China is finishing 2011 on a weak note.

Both the official and HSBC PMIs are stuck near their weakest levels since early 2009, when China took a blow from the global financial crisis.

Economists polled by Reuters this month forecast the PBOC will deliver 200bps of required reserve ratio (RRR) cuts by the end of 2012 but refrain from cutting interest rates unless quarterly GDP growth dips below 8%.

Economists typically view growth of 7% to 8% as the bare minimum needed to generate enough jobs to help China absorb the urban influx of rural migrants and maintain social harmony.

China's central bank cut reserve requirements for commercial lenders late in November for the first time in three years.

The RRR remains at 21% for big banks, giving the central bank plenty of room to cut and free up funds that could be used for lending.

Persistent capital outflows from China are putting more pressure on the central bank to release cash to keep credit conditions supportive for growth.

Underlying indexes of the HSBC PMI showed softening demand at home and abroad, which helped cool inflation – a boon for Chinese policymakers, according to the data collated by UK-based information firm Markit.

The sub-index for overall new orders edged up to 46.9 in December from November's 45, but still signalled falling demand. New export orders shrank in a reflection of listless demand from the US and Europe – China's top overseas markets.

Average input costs faced by manufacturers continued to moderate as raw material prices slipped, the HSBC survey showed.

Inflation appears to be cooling, having fallen from a three-year high of 6.5% in July to 4.2% in November, creating additional room for policy easing to support growth.

HSBC's Qu expects the government to move on the fiscal front to boost job creation, cutting taxes for exporters – a sector employing more than 30 million workers – while increasing spending on public housing and other projects.

"On top of monetary easing … we have long argued that fiscal policy can, and should, play a more important role in stabilising growth and jobs ," Qu said.

In a year dominated by the European debt crisis, the FTSE 100 has lost 5.5%, knocking around £85bn off the value of Britain's top companies.

The leading index closed at 5572.28 in a half day of trading ahead of the new year, up 5.51 points on the day. Since January 1, it has fallen by 327 points.

The decline accelerated during the summer as the scale of the eurozone's problems became apparent, with Italy and Spain following Greece onto the sick list and politicians seemingly unable to come to an agreement on how to tackle the situation. After touching 6105 in February, the index reached its nadir of 4791 in August, before recovering some ground on optimism a solution could be reached. But with investors expecting agencies to downgrade France's AAA credit rating, fears the European bail out funds may not be enough and worries about a global recession and a Chinese slowdown, the rally was muted with December recording a gain of just 67 points.

The UK outperformed European markets, however, mainly on the hope the fallout from the crisis on the continent could be contained. The Euro Stoxx 50 is on course for an 18% decline, with worries of sovereign debt defaults and banking failures dominating sentiment. Germany's Dax is currently down around 15%, France's Cac and Spain's Ibex 17.5% and Italy's FTSE MIB down 26%. In Greece, one of the first to be gripped by the debt crisis, the Athens stock market has lost 61%.

In Japan the Nikkei 225 index ended down 17% at 8455, its lowest level since 1982. Apart from the eurozone crisis, the country also suffered from March's devastating earthquake and tsunami which hit its manufacturing base hard. Meanwhile in Australia shares fell 14.5% during 2011 while China dropped 22% on fears of a property bubble and a hard landing for its hitherto booming economy.

The world's biggest economy is bucking the downward trend. In the US the Dow Jones Industrial average is up more than 6% at the moment while the more broadly representative S&P 500 is just marginally higher at 1263.

Simon Denham at Capital Spreads said 2012 was unlikely to be any easier for investors:

We have further austerity measures to look forward to, together with a Eurozone crisis that is far from resolved. There is also uncertainty over how China's slowdown will land, together with political issues, like the 2012 US elections and concerns over Iran, to contend with.

A sharp rise in France's unemployment figures is putting pressure on President Nicolas Sarkozy to deliver, with over half the French population wanting the candidates for the spring presidential election to focus their energies on maintaining jobs.

Figures released by the labour ministry this week show that the number of those unemployed hit 2.85 million in November, a 12-year high and the seventh consecutive monthly increase.

The numbers have sparked a debate in France about the nature and future of employment with Sarkozy convening a jobs summit on 18 January.

Unemployment as an issue is a number-one priority on French voters' minds. According to a poll in La Croix newspaper, 52 percent of French people want the candidates for the April presidential elections to focus on responses that "maintain employment."

Of the main candidates in the running, socialist contender Francois Hollande is seen as proposing the best solutions to the daily problems of French citizens by 24 percent of those polled. Sarkozy comes in second with 20 percent and far-right politician Marine Le Pen in third place (16%).

While all candidates will focus on combatting unemployment and there are set to be many proposals for economic growth, their hands will be tied by France's commitment to reduce its high budget deficit, as part of an overall plan to contain the eurozone debt crisis.

This is how collapse happens!

Petroplus shuts 3 oil refineries as cash runs out

Petroplus is to close three of its five oil refineries over the coming weeks because it has run out of money for crude supplies since bankers froze its credit lines abruptly this week.

Talks with the bankers have been "open and constructive" and will continue in the coming days, the financially troubled company said in a statement about the closures on Friday.

"In the meantime, the company will start temporary economic shutdowns of the Petit Couronne (France), Antwerp (Belgium) and Cressier (Switzerland) refineries in January 2012 given limited credit availability and the economic climate in Europe."

A victim of oversupply in European refining and of an investment strategy under former boss Thomas O'Malley that fell foul of an industry downturn, Petroplus and European government officials have been locked in talks with the 13 banks that froze a $1 billion facility it needed to buy crude oil.

Friday's announcement follows days of talks among bankers, government officials and the company aimed at keeping fuel flowing from Europe's biggest independent refinery.

Oh, sure, don't get me wrong, there may still be a Euro a year from now. And there’ll certainly be some investors left.

But the Euro, if it manages to survive, will have to do so in what can only be characterized as a radically different form and shape. At the same time, small mom and pop stock investors will be few and far between; there's no money in the "traditional" stock markets, as they've found out - once more - in 2011. Many will also need what money they still have in stocks to pay down various kinds of other obligations.

As for the stock markets, I found it greatly ironic that on December 23, the S&P 500 was up for the year. Yesterdays markets plunge did away with that irony, but given the psychological importance, I wouldn't be surprised if, in the slim trading volume between Christmas and New Year's, one party or another will make sure the number comes in positive anyway.

What strikes me in all this is the disparity between the S&P and financial stocks. It’s unreal. If mom and pop hold bank stocks, they're not very likely to have turned a profit. If pension funds are anything to go by (they lost big time this year), mom and pop had lean turkey at their holiday family parties.

Here's a little overview of the year-to-date performance of some of the major global banking stocks on December 29, 2011, before the opening bell:

•BofA: -60.38%

•Citi: -44.76%

•Goldman Sachs: -46.41%

•JPMorgan: -23.03%

•Morgan Stanley: -45.24%

•RBS: -50%

•Barclays: -34.32%

•Lloyds: -63.02%

•UBS: -29.33%

•Deutsche Bank: -28,55%

•Crédit Agricole: -56.04%

•BNP Paribas: -37.67%

•Société Générale: -59.57%

These are just some of the Too Big To Fail institutions. And while your governments have enough faith in them - or so they want you to believe - to prop them up with trillions of dollars of your money, investors are fleeing them, even if they can expect them to be propped up further.

That doesn't just say something about confidence in the individual banks, it shouts loud and clear from the rooftops on confidence in the banking system as a whole, and indeed on governments' ability to continue bailing them out. In other words: bailouts don’t build confidence, they are taken as a sign that trouble's on the way.

Mom and pop will finally clue in to this in 2012, and get -their money- out of harm's way. Well, either that or lose it. Their money, that is. Perhaps their minds too. And their homes. Their jobs.

Of the banks above, the European ones are in even deeper doodoo than their U.S. counterparts. Gordon T. Long, in a report called Collateral Contagion, lifts a hitherto little known part of the veil:

There are approximately $55 trillion of banking assets in the EU. This compares to only $13 trillion in the US. Bank assets in the EU are 4 times as large as in the US.

In the US, debt held by the bank is smaller because retail deposits are a primary source of funds. EU banks use wholesale lending and, as a consequence, the debt held by banks is close to 80% versus less than 20% by US banks.

Wholesale bank lending in the EU approximates $30 trillion versus only $3 trillion in the US, a 10 X differential.

Wholesale lending is fundamentally borrowing from money market funds and other very short term, unsecured instruments. The banks borrow short and lend long. It all works until short term money gets scarce or expensive.

Both have occurred in the EU and this recently placed Dexia into bankruptcy, forcing it to be taken over by the Belgian and French governments. The unsecured bond market

fundamentally closed in the EU in Q3 2011, as fears mounted that an EU solution was not forthcoming.

Assuming $30 trillion of loans is spread over three years, EU banks have a requirement for $800 billion a month of rollover financing for wholesale lending outstanding.

Ilargi: If those numbers don't render you speechless, please read them again. $800 billion a month of rollover financing, every single month for three years.

The ECB recently passed out €489 in three-year loans at 1%. Nobody was impressed for more than a few hours. Gordon T. Long's report reveals at least a part of the reason why. Moreover, the ECB is now accepting the proverbial toilet paper as collateral for the loans, but guess what, banks are running out of toilet paper! David Enrich and Sara Schaefer Muñoz touch on the same topic for the Wall Street Journal:

Europe's Banks Face Pressure on Collateral

Even after the European Central Bank doled out nearly half a trillion euros of loans to cash-strapped banks last week, fears about potential financial problems are still stalking the sector. One big reason: concerns about collateral.

The only way European banks can now convince anyone—institutional investors, fellow banks or the ECB—to lend them money is if they pledge high-quality assets as collateral.

Now some regulators and bankers are becoming nervous that some lenders' supplies of such assets, which include European government bonds and investment-grade non-government debt, are running low.

If banks exhaust their stockpiles of assets that are eligible to serve as collateral, they could encounter liquidity problems. That is what happened this past fall to Franco-Belgian lender Dexia SA, which ran out of money and required a government bailout.

"Over time it is certainly a risk," said Graham Neilson, chief investment strategist for Cairn Capital Ltd. in London. "If banks don't have assets good enough to pledge as collateral, they will not be able to tap as much liquidity...and this could be the end-game path for a weaker bank."

Ilargi: The market for unsecured bonds issued by banks is dead. And they no longer have any collateral left to issue secured bonds. So what will they do?

Saw this Guardian headline yesterday: "Liquidity crunch fears stalk markets." I’d say that should have read "Solvency crunch fears stalk markets." The ECB has taken care of short term liquidity. But to no avail.

Collateral equals solvency. The ECB loans equal liquidity. And liquidity means nothing if you're insolvent. Inevitably, banks will start to fall by the wayside. Even some of the Too-Big-To-Fail ones.

As will countries. There is no chance - well, I’ll give you 1% or 2% - that Greece will still be part of an unchanged Eurozone a year from now. Chances for Portugal, Ireland, Italy and Spain may be a bit higher, but certainly not by much. France will face huge market pressure. And presidential elections.

The road going forward has become completely unpredictable. For you and me, and also for our "leaders." They don’t like that, even less than we do. That's why we saw this report from Philip Aldrick in the Telegraph a few days ago:

The Government is considering plans to restrict the flow of money in and out of Britain to protect the economy in the event of a full-blown euro break-up.[..]

Officials fear that if one member state left the euro, investors in both that country and other vulnerable eurozone nations would transfer their funds to safe havens abroad. [..]

Under European Union rules, capital controls can only be used in an emergency to impose "quantitative restrictions" on inflows, [..]

Capital controls form just one part of a broader response to a euro break-up, however. Borders are expected to be closed and the Foreign Office is preparing to evacuate thousands of British expatriates and holidaymakers from stricken countries.

The Ministry of Defence has been consulted about organising a mass evacuation if Britons are trapped in countries which close their borders, prevent bank withdrawals and ground flights.

Every government, in Europe and in the U.S., is busy working on contagion plans, just like this one, over the holidays. Bank holidays are considered, capital controls, travel restrictions.

In order to keep the basics of their economies going in case of financial disaster, governments will need to make sure they have the means to cover basic necessities. In a world where most of the energy and food is imported, that is a herculean task.

Who's going to issue the letters of credit that make imports possible? And what will they be covered with? Will Saudi Arabia, Russia, China and the U.S. still accept euros when the defection of Greece and/or others makes the future of the Eurozone and the entire EU highly uncertain? No, they will probably want guarantees in U.S. dollars.

As we speak, the euro is getting hammered, as is sterling, as is gold. Or are they? Or is it perhaps that the USD is rocking, in anticipation of near-future demand?

The risks for Europe come from all sides now, and at some point, which I think could be very close, one of these risks will not be -fully- covered. Because of the close interconnectedness between EU countries, as well as that between European and global financial institutions, one single domino may set in play a chain of events that will be beyond governments' control.

And, as I said, they don't like that. They may opt to pre-empt any such possible events. In the Eurozone alone, we're looking at 17 different governments who may decide to do so, in whatever way. Leave the Eurozone, leave the EU, stall decision making, refuse to pay debt.

17 different governments, many of whom will change during the course of the year, have multiple options that would derail the entire EU project as it was intended to be.

While sovereign and private debt is certain to keep on rising, and willingness to lend in order to stave off defaults is disappearing.

No, I don't know what the euro will look like next Christmas, but it won't be what it looks like today. It could be the return of the drachma and lira, or the return of the mark and guilder, or all of the above. But not a 17-country Eurozone.

Unwilling to back down from the growing criticism that his foreign policy would be “dangerous,” Ron Paul told voters in Iowa that western sanctions against Iran are “acts of war” that are likely to lead to an actual war.

Paul said that Iran would be justified in responding to sanctions by blocking the Straits of Hormuz, adding that the country blocking the strategically important strait is “so logical” since they have no other recourse.

He then compared the situation to China blocking off the Gulf of Mexico to trade.

“I think the solution is to do a lot less a lot sooner, and mind our own business, and we wouldn’t have this threat of another war,” Paul said.

Paul made the comments to a crowd of 100 people in Perry, Iowa, the first stop on his two-day campaign swing through the western part of the state.

The Texas congressman is not backing down from his view that a strike on Iran would cause economic hardship at home.

“If the Straits of Hormuz close, this whole financial thing could come down on our head. What would happen if oil doubled in price within a month or two?” Paul asked a crowd in Atlantic, Iowa.

Thursday was a tough day for Paul, beginning with a scathing editorial in the New Hampshire Union-Leader calling the Texas congressman a “dangerous man” who has been consistently spouting “nonsense,” adding, “it is about time New Hampshire voters showed him the door.”

That was followed by a new web ad from Gov. Jon Huntsman, who labeled Paul “unelectable” citing a decade worth of newsletters which were published by him and bore his name and contained bigoted statements against minorities.

But it wasn’t all bad news for Paul, who was greeted at his last campaign stop in Council Bluffs, Iowa by about 750 supporters who gave the congressman a boisterous welcome.

“I’m so disappointed,” Paul said smiling adding “I was told that I was coming to meet with a lot of undecideds.”

However, Austrian banks' ties to the struggling country are the primary cause for concern in the European economy. They have an estimated $226 billion in exposure to Eastern Europe, with €1.14 trillion ($1.6 trillion) of assets held in the region. Though the silent beneficiary of liquidity measures by the European Central Bank, yields on Austrian 10-year government bonds have risen to more than 2.93% this morning.

Yields on Hungarian 10-year government bonds have spiked this year.

The fact that an estimated 50% of government debt is denominated in foreign debt seriously calls into question Hungary's ability to pay back lenders. The forint is hitting its lowest value against the dollar since early 2009 and bailout aid is in jeopardy, the prognosis is grim for investors.

In our opinion, changes to the constitution and the functioning of some independent institutions, including the central bank and the constitutional court, have undermined Hungary's institutional effectiveness.

Following changes to the process of appointing members of the central bank's monetary policy committee in 2010, the authorities most recently have proposed legislation that we believe could further compromise the central bank's independence.

The EU and IMF had asked Hungary to consider other proposals for maintaining the bank's independence. In particular, the European Union disagreed with two major points of the new law—an increase in the number of representatives in the monetary council and the number of deputy governors and a stability law that would force banks to stomach losses on foreign loans.

Again, from S&P:

Moreover, we believe that measures taken over the past year, which affect several services sectors, could hinder economic growth by reducing banks' willingness to lend and companies' appetite to invest. In particular, the imposition of temporary tax hikes on various services--including telecoms, energy, and the financial and retail sectors--is likely to depress investment and job creation in the short term, in our view. This could constrain growth prospects at a time when we see risks to the open Hungarian economy are rising due to the uncertain outlook for the global economy."

While Bloomberg reports that the EU government will examine the new law "in depth" and has sworn it will be "constructive" in its dealings with the country, continued government unwillingness to bend to the whims of international organizations bodes ill for the sustainability of government debt.

In a deal to save money, two-thirds of the streetlights were yanked from the ground and hauled away this year, and the resulting darkness is a look that is familiar in the wide open cornfields of Iowa but not here, in a struggling community surrounded on nearly all sides by Detroit.

Parents say they now worry more about allowing their children to walk to school early in the morning. Motorists complain that they often cannot see pedestrians until headlights — and cars — are right upon them. Some residents say they are reshaping their lives to fit the hours of daylight, as the members of the Rev. D. Alexander Bullock’s church did recently when they urged him to move up Saturday Bible study to 4 p.m. from the usual 7 p.m.

“It’s just too dark,” said Mr. Bullock, of Greater St. Matthew Baptist Church. “I come out of the church, and I can’t see what’s in front of me. What happened to our streetlights is what happens when politicians lose hope. All kinds of crazy decisions get made, and citizens lose faith in the process.”

Cities around the nation, grappling with what is expected to be a fifth consecutive year of declining revenues and having exhausted the predictable budget trims, are increasingly considering something that would once have been untouchable: the lights.

Highland Park’s circumstances are extreme; with financial woes so deep and long term, it has extinguished all but 500 streetlights in a city accustomed to 1,600, utility company officials say. But similar efforts have played out in dozens of towns and cities, like Myrtle Creek, Ore., Clintonville, Wis., Brainerd, Minn., Santa Rosa, Calif., and Rockford, Ill.

What distinguishes these latest austerity measures is how noticeable they are to ordinary residents. If health care cuts, pay cuts, layoffs and furloughs — and even limits on enforcing building codes or maintaining parks — are most apparent to the people inside city halls, everyone notices when his streetlights go dark (and some cities, like Colorado Springs, where the issue boiled over, have already resumed some lighting when revenues allowed).

Turning off the lights has drawn grumpy crowds to city council meetings, stirred jealousy among neighborhoods and neighbors, and set off conversations about crime.

“I go around town, and even I think some areas seem a little darker than they should be,” said Tim Hanson, the public works director in Rockford, where officials turned off 2,300 of the city’s 14,000 lights. “It was not anything that I wanted to do, and it was nothing that the mayor or aldermen wanted to do, but it’s like your own budget at home — we can’t afford this anymore.”

Here in Highland Park, that had been true for a while. Over a matter of years, the city accumulated a debt of about $4 million to DTE Energy, the utility company. The city was paying less than half of its $60,000 monthly bill for an antiquated lighting system that was costly to maintain. So the company and city struck a deal. The company could turn off and take away 1,300 of the city’s lights, add 200 lights in strategic locations, and the debt would be forgiven, said Scott Simons, a spokesman for DTE.

The result in this 2.9-square-mile city feels like this: Lights are still abundant along Woodward Avenue, the crowded commercial strip. But a block away, along the quieter, residential streets, lights now remain mostly at intersections. Long stretches of blocks are dark, silhouettes of people are barely visible and potholes appear suddenly beneath tires.

Some people here say they learned of the plans this fall only when a truck pulled up outside their homes and workers began pulling the poles from the ground. (Though the added step of removing the lights — not just turning them off — seemed an affront to residents, company officials said it had to be done for liability reasons and to avoid continuing reports of power failure and the risk of metal theft.)

“The people were basically left in the dark,” said DeAndre Windom, who was elected mayor in November. He said the disappearing streetlights were the top concern of residents as he campaigned door to door.

“When you come through at night, it’s scary; you have to wonder if anyone is lurking around waiting to catch you off your guard,” said Juanita Kennedy, 65, who said she had installed a home security system and undergone training to carry a handgun in the weeks since workmen carried away the streetlight in front of her house. “I don’t go out to get gas at night. I don’t run to any stores. I try to do everything in the daytime and to be back before night falls.”

Hope but no money

Highland Park, home of Henry Ford’s first moving assembly line, was once a well-off enclave of 50,000 residents. Ford left long ago, and Chrysler’s corporate headquarters moved away in the 1990s. Now it has fewer than 12,000 residents — half the size it was just 20 years ago.

So for this city, a shrunken tax base and financial crisis have been long in the making, and the recent national downturn has only made matters worse. More than 42 percent of Highland Park’s residents live in poverty, unemployment is high and the median income here is nearly $30,000 below that of the state.

“To understand our street lighting situation is to understand the wealth that Highland Park once had; it was a situation where we had the best of almost everything and an abundance of lights,” said Rodney Patrick, whose father insisted on moving his family to Highland Park in the early 1950s because of its advantages — its status, in his words, as the shining city on the hill. “But we don’t have the residents to have the luxuries we had when we were a city of 50,000.”

If the outcome seems imperfect to many residents, not everyone views it as dire. “The lights are not out in Highland Park,” said Mr. Patrick, who serves on the City Council. “We’ve had a reduction, a responsible reduction.”

It is too soon to judge whether the lights have affected safety here. Officials from other communities and studies on the question of streetlights and crime draw mixed conclusions.

In Highland Park, yard lights and even strings of Christmas lights are helping to illuminate some streets, and some leaders have urged residents to add their own lighting if they are worried about security — leading to complaints that the city is trying to shift items it cannot afford to residents who cannot afford them either.

In cities around the nation, similar ideas have emerged: streetlight user fees, private security lights, even optional “adopt-a-light” programs comparable to road sponsorships.

In Oregon, officials in Myrtle Creek turned off 78 of the city’s 297 streetlights in 2010, to save $11,000. A streetlight sponsorship program suggests that nerves have calmed. Last year, people paid to keep six of the lights on. Now, only two of the lights remain adopted and lighted. “Nobody’s talking about it anymore,” said Aaron K. Cubic, city administrator in the rural community, 90 minutes south of Eugene.

Not so in Highland Park, where the measure is newer and the darkness more pronounced. There is hope for new lights, though no money for them. The mayor-elect, Mr. Windom, said that he was in conversations with groups that might consider Highland Park as a pilot project for some more energy-efficient, environmentally conscious, experimental lighting system.

“We can’t go back,” said Mr. Windom, who has, for now, urged residents to turn on their porch lights.

Friday, 30 December 2011

Foreign and domestic distressed debt funds expect a big supply of bad loans to come on to the market in China after at least five years in which banks largely sat on their portfolios of troubled loans.

Executives at Clearwater Capital, a Hong Kong-based fund, and at Guangzhou-based Shoreline Capital say Chinese lenders must dispose of existing bad loans to prepare for a new batch of non-performing debt, stemming from the credit binge Beijing encouraged following the global financial crisis.

“Now that there is a new flow of bad loans, the banks have to dispose of their legacy loan problem,” says Ben Fanger, co-founder of Shoreline. “Deals being offered to Shoreline are at prices that are lower, on average, than in recent years. We are now having meaningful dialogues again.”

The extent to which Chinese banks deal with their problem loans provides clues to the health of the economy generally. By cleaning up their balance sheets, the Chinese banks will make room for new lending and financial experts suggest that any sign that China is dealing with bad debts in a commercial way is reassuring for future growth and the investment climate generally.

China’s big banks are under pressure to sell their non-performing loans because they face tougher reporting requirements after listing in Hong Kong. Moreover, Chinese banking regulators believe the banks are underreporting their problem loans and have urged lenders to double their capital cushions. Investors say these twin pressures mean banks now have more incentive to get bad debts off their balance sheets.

“Banks have far less discretion now than in the past,” says Mike Werner, an analyst at Sanford Bernstein in Hong Kong.

While nobody can calculate the potential supply, the way China revved up its credit machine in 2009 suggests the figure could be substantial. Morgan Stanley reckons Chinese banks lent more than $4.1 trillion in the two years from the end of 2008. Total credit estimates rise to $5.7 trillion when flows outside formal bank lending channels are included.

The credit boom came to an end earlier this year as Beijing started raising interest rates to rein in inflation and an overheated property market. However, last month it eased monetary policy slightly amid fears that economic growth was slowing and that the Chinese manufacturing sector was taking an unexpectedly big hit from a decline in foreign orders, while inflation has been on a downward trend.

Estimates vary widely on the amount of bad loans in China. While Chinese regulators in March put the figure at less than $500 billion, Fitch, the rating agency, estimates non-performing loans exceed $2 trillion. That amount can only swell as Chinese manufacturers receive fewer overseas orders because of the euro zone crisis and a weak economic recovery in the US. Mr. Werner says he is concerned about bad loans in the manufacturing sector, which have been paid less attention as the market focused on the health of property developers.

“There is about $200 billion to $300 billion in distressed debt just in the state-owned enterprises,” says Rob Petty, founder of Clearwater Capital which has allocated about 30 per cent of its funds to invest in China.

Foreign distressed asset buyers have flocked to China before. But many, including New York-based Avenue Capital, left unsatisfied, feeling that they had overpaid for the loans. Some also had problems enforcing their rights over the assets, while others relied on financial statements that were not always accurate instead of doing their own due diligence.

Meanwhile, changing regulations in the US – particularly the Volcker rule banning proprietary trading – also mean that investment arms of banks such as Goldman Sachs and Morgan Stanley are no longer active, making the competitive landscape less crowded.

But potential buyers such as Clearwater, Shoreline and Apollo Management, the New York-based private equity firm that is considering buying Chinese distressed debt for the first time, say Chinese banks have established more transparent procedures than in the past.

They say the banks are either entering into direct negotiation with interested buyers, or transferring the debt to asset management units created to deal with the previous rounds of bad loans before the banks went public.

Those firms, which the major state-owned banks including Agricultural Bank of China, Bank of China, China Construction Bank and Industrial & Commercial Bank of China set up a while ago, have not always been keen actually to dispose of the loans. Today, though, the asset management arms now have more than a hundred branches across China, making the process much easier.

Mr. Petty – whose firm did not participate in the last round of bad loan disposals because he believed prices were too high and the field too crowded – has now put almost $500 million to work in China to buy the distressed debt of individual companies,

particularly property firms that have physical assets that he can take as collateral. Mr. Petty believes distressed debt in China has become more attractive because the government is protecting investors’ rights, including foreign creditors.

“As China becomes more capitalistic, it becomes more concerned with creditor rights and shareholder rights,” he says.

Japan to Double Sales Tax to Reduce Debt

Japan’s ruling party agreed on a plan to double the sales tax by 2015 after weeks of internal debate and a member revolt as Prime Minister Yoshihiko Noda fights to head off another credit-rating downgrade.

The proposal decided on late yesterday would raise the sales tax from 5 percent to 8 percent in April 2014 and to 10 percent in October 2015. The details must be approved by a government panel led by Finance Minister Jun Azumi before discussion with an opposition whose Liberal Democratic Party has already hinted it may not back them.

“It will be very tough,” Jun Okumura, a former Japanese trade ministry official and a consultant at the Eurasia Group risk consulting firm in Tokyo, said today by telephone. “The bill may not pass parliament as the LDP may oppose the Democratic Party of Japan bill for political reasons.”

Noda is staking his job on raising the sales tax, a stance that already contributed to his predecessor’s resignation. Standard & Poor’s said last month it was considering lowering the country’s sovereign rating, already cut in January to AA-, as Noda’s government makes little progress at tackling the country’s debt burden.

With an aging population and two decades of low growth fueling the world’s largest public debt, the burden is projected to exceed 1 quadrillion yen ($13 trillion) in the current fiscal year. Still, Noda faces dissent within his own party as he pushes to raise the sales tax, with at least nine members citing the party’s failure to keep campaign promises for resigning two days ago.